Wednesday morning on Bloomberg Surveillance (see video link below), Frances Donald, chief economist with the Royal Bank of Canada, highlighted the potential risk of “… dysfunctions in the supply chains that leads to more problematic developments this year.” She emphasized, “… when you start to mess with supply and demand dynamics within supply chains, when you have ships that stop coming to shore, it is not a one month fix. Sometimes it can take months or years to recalibrate supply and demand.” In response to one question, Ms. Donald offered that there will be supply shortages in the United States based on what has happened over the last month — made better or worse by what is still ahead.
I spent the last ten days in Europe. I expected to be asked to explain or even justify US policy. Not really. The Europeans with whom I met understand what is happening and why. They are amazed at the self-harm being done, but are not in denial regarding what has happened — thus far. I am still processing what I heard last week. But here’s a “concise” take-away that I have circulated with some of my discussion partners.
Demand will still decide. Products will be produced (or not) and flow (or not) depending on expressions of effectual demand. Where demand can return costs-plus, there will still be flow. When and where demand cannot return that plus, there will not be flow. Ten percent higher tariff-related costs will not, alone, shift flows much. Twenty-percent? Probably depends on the product. Forty-percent? Well, we (Europeans) will sell much more to other places and people… and probably much less overall. Americans have been very robust consumers. We will miss them.
So far, I have certainly received more nuanced characterizations. But no one fundamentally disagrees with this reductionist summary.
I have not yet heard back from one German business leader who asked all of us around the table, “Are we in denial? Have we decisively shifted into an autarkic global reality, but are emotionally unable to read the writing on the wall? Or are we carefully watching foolish posturing that still has a chance of being substantively reversed and we want to reward — and rewarded by –the reversal? Will we know by the end of this year?”
No one volunteered an answer to these questions. Everyone I could see pursed their lips.